Service Tax

Tax on Sub-contractors of infrastructure Contractors - new Circular

2011-05-10T11:42:00.002+05:30

The government has issued a circular which is reproduced below. Jaiprakash Associates – a well known infrastructure contractor had made a representation wherein they appealed the government to give relief to sub - service providers (mind-well I am not using the term SUB CONTRACTOR) to infrastructure companies like the architects - so far so good - noble intentions are never rewarded - and thats the story - now read the circular - the question asked was X and the answer given is X+Y. I dont know why a contractor is exempt for constructing a road whereas an architect or an engineer is not - but holistically and strictly in accordance with today’s written law I tend to agree with the circular but the circular goes ahead and concludes that - sub-contractors are not exempt from providing these infrastructure services like roads.

The circular is saying that the classification of the service provided by the sub-service providers must be classified in categories other than WCS - that is absolutely correct as per law – how can an architect or an engineer be classified under WCS – but when the circular uses the word “sub-contractor” – the officers in the field with limited knowledge and unlimited views will take it to its illogical conclusion and this in turn will create big round of litigations. I will try to analyse this circular through a live example.

Example:

A XYZ company gets a contract to built a 100 kms highway from NHAI – he in turn sub-contracts 25 kms of it to another contractor on back to back basis and starts construction of the rest of the 75 kms by himself for which he appoints following outside agencies

Engineering Firm
Excavation company
A company which will install the traffic signals and so on

The implication of the circular will be as under:

1. The sub-contractor who is going to construct the 25 kms of road will be fully exempt even though he is a sub-contractor as his service will still fall within the WCS head where roads are exempt

2. Engineering firm will be taxable as its services fall under consulting engineering services head (this was the legal position earlier also)

3. Excavation company will fall under the site preparation services – where there is a exemption notification for roads – hence it will not be taxable

4. The company which will install the traffic signals will be taxable as its services will fall within the erection services definition – here there will be problems as similar definition is there in WCS also – so now litigation will start on this.

All in all this circular will create big problems for people who classify there services in WCS even though the same are classifiable under different category. It is known fact that WCS is more specific category when material and labour are involved and VAT is applicable so the assessees will win hands down in such situations but the crux is that they will have to fight for something which is rightfully theirs.

Drafters of such sensitive circulars must take care and not play mischief with words – infrastructure works will get affected – no doubt.

Pls go thru the below circular:

Circular No. 138/07/2011 – Service Tax

F. No. 137/57/2011 – Service Tax

Government of India

Ministry of Finance

Department of Revenue

(Central Board of Excise & Customs)

****

New Delhi, the May 2011

Chief Commissioners of Central Excise & Customs (All)

Chief Commissioners of Central Excise (All)

Director General of Central Excise Intelligence

Director General of Audit & DGST

Commissioners of Service Tax (All)

Madam/Sir

Subject: Representation by Jaiprakash Associates Limited, Noida, in terms of Judgement dated 14.02.2011 in W.P. No. 7705 of 2008 – regarding

**********

The Works Contract service (WCS) in respect of construction of Dams, Tunnels, Road, Bridges etc. is exempt from service tax. WCS providers engage sub-contractors who provide services such as Architect’s Service, Consulting Engineer’s Service, Construction of Complex Service, Design Services, Erection Commissioning or Installation Service, Management, Maintenance or Repair Service etc. The representation by Jaiprakash Associates Limited seeks to extend the benefit of such exemption to the sub contractors providing various services to the WCS provider by arguing that the service provided by the sub contractors are ‘in relation to’ the exempted works contract service and hence they deserve classification under WCS itself.

2. The matter has been examined.

(i) Section 65A of the Finance Act, 1994 provides for classification of taxable services, which mentions that classification of taxable services shall be determined according to the terms of the sub-clauses (105) of section 65. When for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of clause (105) of section 65, classification shall be effected under the sub-clause which provides the most specific description and not the sub-clauses that provide a more general description.

(ii) In this case the service provider is providing WCS and he in turn is receiving various services like Architect service, Consulting Engineer service, Construction of complex, Design service, Erection Commissioning or installation, Management, maintenance or repair etc., which are used by him in providing output service. The services received by the WCS provider from its subcontractors are distinctly classifiable under the respective sub clauses of section 65 (105) of the Finance Act by their description. When a descriptive sub clause is available for classification, the service cannot be classified under another sub clause which is generic in nature. As such, the services that are being provided by the sub contractors of WCS providers are classifiable under the respective heads and not under WCS.

(iii) Attention is also invited to CIRCULAR NO 96/7/2007-ST, dated 23^rd August, 2007 regarding clarification on technical issues relating to taxation of services under the Finance Act, 1994. The relevant portion is reproduced below,-

999.03 /23.08.07

A taxable service provider outsources a part of the work by engaging another service provider, generally known as sub-contractor. Service tax is paid by the service provider for the total work. In such cases, whether service tax is liable to be paid by the service provider known as sub-contractor who undertakes only part of the whole work.

A sub-contractor is essentially a taxable service provider. The fact that services provided by such sub-contractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor. Services provided by sub-contractors are in the nature of input services.

Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided.

4. Therefore, it is clarified that the services provided by the subcontractors / consultants and other service providers are classifiable as per Section 65 A of the Finance Act, 1994 under respective sub clauses (105) of Section 65 of the Finance Act, 1944 and chargeable to service tax accordingly.

Yours faithfully

(Deepankar Aron)

Director (Service Tax)

CBEC, New Delhi

Comparative study of changes brought to Section 73 of the Finance Act, 1994 (Service tax) and Section 11A of the Central Excise Act, 1944

2011-03-17T16:55:00.002+05:30

Introduction:
There are amendments galore in the recently announced budget more so in the indirect taxes field. One of the major thrusts of this budget are the changes brought about in the penal provisions. It would not be an exaggeration to say that the penal provisions have been completed overhauled. This article has made a humble attempt to study the changes in brief and also to do a comparative study of the changes brought about in section 73 of the Finance Act, 1994 (ST) and its counterpart section 11A of the Central Excise Act, 1944. (CEA)

Service tax :
Section 73 of the Finance Act has section 73 (3) read with 73 (4) which provides that if the assessee himself or on saying of the department pays the tax and interest thereon then the department will not levy any penalty on him unless the reason for short on non-payment tax was due to fraud, collusion, wilful mis-statement, suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.

The above discussed provision was widely used by the department to grant waiver of penalty to assessees who paid tax voluntarily or during the audit process.

In cases where fraud or collusion etc is involved the benefit of section 73 (3) was and is not available but in such case another Section 73(1A) gave the benefit of paying 25% of the tax as penalty if the tax + interest + 25% penalty were paid within 30 days of the issuance of SCN. Now this section 73 (1A) is deleted.

Now a new section 73 (4A) has been introduced which is as under:

‘(4A) Notwithstanding anything contained in sub-sections (3) and (4), where during the course of any audit, investigation or verification, it is found that any service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded, but the true and complete details of transactions are available in the specified records, the person chargeable to service tax or to whom erroneous refund has been made, may pay the service tax in full or in part, as he may accept to be the amount of tax chargeable or erroneously refunded along with interest payable thereon under section 75 and penalty equal to one per cent of such tax for each month, for the period during which the default continues, up to a maximum of twenty five per cent. of the tax amount, before service of notice on him and inform the Central Excise Officer of such payment in writing, who, on receipt of such information, shall not serve any notice under sub-section (1) in respect of the amount so paid and proceedings in respect of the said amount of service tax shall be deemed to have been concluded:
Provided that the Central Excise Officer may determine the amount of service tax, if any, due from such person, which in his opinion remains to be paid by such person and shall proceed to recover such amount in the manner specified in sub-section (1).
Explanation.—For the purposes of this sub-section and section 78, “specified records” means records including computerised data as are required to be maintained by an assessee in accordance with any law for the time being in force or where there is no such requirement, the invoices recorded by the assessee in the books of account shall be considered as the specified records.’;

From the above text it can deduced that in cases where the department during an audit, investigation or verification discovers a short or non-payment of tax then the assessee will automatically and mandatorily become liable to pay penalty @ 1% of tax per month subject to a maximum of 25% of tax. So now there are 2 clear lines of action which are as under:

1. If an assessee himself goes to the department and pays the tax and interest – no penalty will be leviable on him.
2. If the department comes calling and finds out the tax – in that case bear minimum penalty would be 1% of tax subject to a maximum of 25% given that the assessee pays the tax, interest as well as this penalty before issuance of penalty.

Central Excise :
Erstwhile section 11A (2B) of the CEA which is a counter part of section 73 (3) and (4) of the Finance Act, also provided that if the assessee himself or on saying of the department pays the tax and interest thereon then the department will not levy any penalty on him or issue an SCN unless the reason for short on non-payment of tax was due to fraud, collusion, wilful misstatement, suppression of facts or contravention of any of the provisions of this Chapter or of the rules made thereunder with intent to evade payment of service tax.

The above discussed provision was widely used by the department to grant waiver of penalty to assessees who paid tax voluntarily or during the audit process.

This provision is still retained in the new section 11A (1 – b) read with sub section (2) but the provision of erstwhile subsection (2B) – Explanation 1 (wherein the benefit to cases of fraud etc was not to be extended) are deleted which means that in cases where an assessee himself comes and pays tax and interest even in cases of fraud, collusion etc the benefit of non levy of penalty will have to be accorded – strange but true. Comments on this are solicited.
Further a new sub-section (5), (6) and (7) are introduced which practically say that in cases where short payment of tax is discovered by the department during the process of audit, verification or investigation then the assessee can pay the tax, interest and penalty @ 1% of tax per month subject to a maximum of 25% of the tax and the department will not issue any SCN to him.

The above benefit or one can say relief is not to be granted in case where the short payment is due to fraud, suppression, willful misstatement etc.

The above provision can be summed up as under:

1. If an assessee himself approaches the department and pays the tax and interest and suppression etc is not alleged.

Service Tax
No penalty is to be levied and no SCN can or should be issued

Excise
No penalty is to be levied and no SCN can or should be issued

2. If an assessee himself approaches the department and pays the tax and interest BUT IT IS A CLEAR CASE OF SUPPRESSION

Service Tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
No penalty is to be levied and no SCN can or should be issued

3. If during an audit, investigation or verification initiated by the department some short payment of tax is discovered but suppression etc is not alleged

Service tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

4. If during an audit, investigation or verification initiated by the department some short payment of tax is discovered but suppression etc is alleged

Service Tax
The assessee has 2 option
a. He can pay 1% per month penalty subject to a maximum of 25% before issuance of SCN; or
b. If he doesn’t pay than the department can issue SCN to levy penalty.

Excise
The assessee does not have the benefit of payment of penalty at 1% subject to a maximum of 25% and hence the department will have to issue an SCN to levy the penalty.

Conclusion:

The above analysis brings out the stark difference in the approach of the government in dealing with similar situations in service tax vis-à-vis excise. Till recently the approach and execution thereof was similar but now defaulters howsoever minor in case of service tax will be dealt with a bit more firmly and more penal consequences have been thrust upon them in contrast to Excise.

Nitesh Jain
Chartered Accountant
www.niteshjain.co.in
Email: nitesh@niteshjain.co.in
+919824182629

2011-03-08T20:05:00.003+05:30

POST BUDGET – 2011 – SERVICE TAX

A CHANGE WISH LIST

I. Point of Taxation Rules 2011.

It is proposed to change the event of levy of taxation vide insertion of Point of Taxation Rules 2011 which is a well come step,

 Considering the intention of legislature to take Service Tax in line with Central Excise, in view of this the definition may be amended to exclude levy of service tax on collection in the form of advances.

 A clarification may be issued for the following,

(i) What would be the situation for Debtors outstanding as on 31.03.2011 on which no service tax paid as service tax was payable only on collection.

(ii) Any form of write/offs (say Bed Debts) for collection upto 31.03.2011.

(iii) Performa Invoice is being issued by many service providers to their clients before taking or starting the actual work for gaining their approval on the proposed fee structure. Once this Performa invoice is approved the service provider accepts the assignment. In other performa invoice cannot be considered a duty paying document. It is suggested that this practice may be allowed without attracting payment of service tax.

 Amended Rule 6 (3) of the Service tax rules provides relief to a service provider in cases where he has issued an invoice and thereafter it is realized that he is not going to provide the said service. But there is no provision which gives relief to service providers where they have provided the service and issued an invoice but have not received the payment in full or part. It is suggested that a provision to this effect is notified.

 A further clarification may be issued for construction activity, as Accounting Standard – 7 issued by ICAI provides for recognition of income in the books of account on percentage completion method whereby certain construction and infrastructure companies issue regular invoices to their clients but do not recognize the same in their accounts due to lack of substantial work undertaken in that accounting year. In this case scenario it would be very difficult for such companies to pay service tax on the issued invoices but non recognition of the same in the books of accounts. Hence you are requested to clarify the applicable law when the invoices issued are not recognized in the books.

II. Short Term Accommodation – Hotel Services - [Proposed Clause zzzzw of Sec 65(105)]

 New Service proposes to tax the hotel industry wherein the declared tariff of the room is more than Rs. 1000/-. It is a normal practice in the Hotel Industry to grant huge discounts on their declared tariffs, please clarify as to applicability of the law on DECLARED or CHARGED tariff.

 Many other services and goods are provided to the customers (like food and other goods are served in the room – popularly termed as ‘Room Service) who take the rooms on hire. – please clarify whether the same are covered or not.

 Many times the hotels have contracts with corporate for blocking rooms exclusively for them irrespective of whether they occupy it or not and a lumpsum amount is charged by the Hotel to the concerned corporate. Please clarify whether Service tax will apply in this case or not.

III. Commercial Training or Coaching Services [Sec 65(27)]

 Restoration of the deleted portion of definition

“but does not include pre-school coaching and training centre or any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognized by law for the time being in force”

Please restore the amended definition of the said section as the intention of legislature is not to tax pre-schooling and recognized courses.

We understand that certain notifications will be issued by the board to give effect to non taxation of recognized courses. A notification may be withdrawn any time (and withdrawal of the same will effect directly to education sector as all schools / colleges / universities) but to amend law specific approval of honorable parliament is required. So it is our request to annul the proposed amendment.

IV. Health Services - [Sec 65(105)(zzzzo)]

 The amendment introduced in the budget to include all medium and big sized private hospitals in the service tax net is a regressive move which will result in increasing the cost of health care to the citizens of India. Public healthcare delivery system does not instill the confidence in the general public hence they are forced to look out for other private avenues to cure their ailments. It is suggested that this move may be rolled back to the earlier position.

 A clarification may be issued for non levy of service tax on fees/amount charged for accommodation provided to the guests accompanying the patient.

 In the budget section 65 (105) (zzzzo) is proposed to be amended wherein sub-clause (ii) of the amended section levies a tax on individual doctors – the proposed sub-clause reads as under:

“By a doctor, not being an employee of the clinical establishment, who provides services from such premises for diagnosis, treatment or care for illness, disease injury, deformity, abnormality or pregnancy in any system of medicine”

The words used are “FROM SUCH” but the practical fact is that the visiting doctors are providing the services to the hospital hence a suitable change from “FROM SUCH” to “FROM OR TO SUCH” will be welcome to avoid any litigation in future.

It is requested to keep poor of the poorest out of the service tax net under the proposed health services. It is suggested that to achieve this it may be provided that any person taking health care services from such taxable hospitals who can provide their bonafide BPL certificate shall be exempt from the levy of service tax.

V. Business Support Services [Sec 65(104c)]

 A Clarification may be issued for what is the intent of the parliament in introducing the word “administrative assistance in any manner” in Business support services.

VI. Section 73(4A)

 A clarification may be issued for what is the meaning of “true and complete details of transactions” – would it suffice that total taxable income earned by a particular assessee is available from the records or is it required that exact Service tax payable amounts are available.
 Who will be the deciding authority whether or not the available records give true and complete details of transactions?

VII. Section 78.

 For an amendment made in 2008 to section 78 whereby it was provided that where penalty under section 78 is applied in those cases section 76 shall not apply – A clarification may be issued to clarify as to period for which this amendment shall apply. In other words a clarification is required to understand whether the amended section shall apply to cases booked for periods prior to this amendment or not.

Trade and industry believe that any issuance of show cause notice post introduction date will have this benefit (irrespective of period covered by the show cause notice)

While department believe that this amendment is applicable only to periods post introduction. i.e. even if show cause notice is issued post introduction of this amendment which covers period prior to amendment then both sections are still applicable (Sec 76 & 78).

VIII. Section 82

 It is proposed to downgrade the powers to authorize and execute search and seizure proceedings – it is requested to restore the earlier position as it may lead to situations of unnecessary harassment of the trade.

IX. Cenvat Credit Rules 2004.

 It is proposed in the amended CENVAT Credit Rules that credit related to construction related activity shall be available to persons providing construction services ONLY. It may be provided that credit related to construction of the premises of the output service provider will be available without any restrictions.

 Service Tax payment is being aligned with the system prevalent in Excise and VAT regime – that of payment of tax on accrual basis however there is no corresponding alignment with regards to the availment of credit – it is still provided that credit of input service will be available only on payment basis. It is requested to amend Rule 4(7) of the CENVAT credit Rules, 2004 to say that CENVAT credit on input services shall also be available on receipt of invoice thereof.

 It is requested that the definition of Input Services may be made more elaborate under inclusive part and should not be restrictive in nature.

 Cenvat Credit may be extended to provide that CENVAT credit of Motor Vehicles will be available to Hotel industry.

 Rule 6(5) should be restored to allow credit of common input services.

 Trading should not be part of service tax laws in either category as taxable or exempted.

Wished by:

CA Nitesh Jain

CA Pravin Dhandharia

Budget Analysis - 2011 Service tax

2011-03-01T12:52:00.002+05:30

Highlight of this budget:

A. Service tax will be payable on accrual basis from 1.04.2011. So the moment a service provider will book any invoice in his books the tax will become payable.

B. Service tax is being levied on all services provided by a medium sized hospital (having more than 25 beds) irrespective of whether the patient has insurance or not.

C. Service tax on Hotels have been introduced in a big way:

a. Room rentals above a declared rate of Rs. 1000 will be chargeable to service tax – with an optional abatement of 50%.

b. Services provided by air-conditioned restaurants having a license to serve alcoholic beverages – this service will get optional 70% abatement.

D. Penal provisions are made harsher with introduction of penalties even when tax is being paid under audit.

E. Introduction of prosecution provisions wherein the assessees evading tax payments for more than 6 months may face imprisonment of upto 3 years.

Gist of Amendments in existing law

1. No change in the rate of service tax – it remains at 10.30 %

NEW SERVICES BROUGHT IN THE TAX NET

2. Two new services are being brought under the tax net:

a. RESTAURANTS

Services provided by air-conditioned restaurants having a license to serve alcoholic beverages – this service will get optional 70% abatement.

b. HOTELS

Hotels and guesthouses giving rooms for accommodation for a continuous period less than 3 months – this service brings into the tax net only rooms having a declared (Rack) rate of more than Rs. 1000 (chargeable rate may be less). This service will get an optional 50% abatement.

CHANGE IN SCOPE OF EXISTING SERVICES

3. Scope of certain existing services is being changed and in almost all cases the changes are drastic :

a. Club or association Services

EARLIER:

Services provided by a club or association to ITS MEMBERS were only taxable NOW:

Services provided to NON MEMBERS will also become taxable

b. Authorised service station

EARLIER:

Services provided by AUTHORISED SERVICE STATION were only taxable

NOW

Services provided by ANY PERSON will be taxable so all small mechanics provided services for more than 10 lacs in a year will become taxable.

c. Lawyers

EARLIER:

Services provided by a firm of lawyers to any individual were not taxable. Secondly legal representational services like appearing in court of law for a client were also not taxable

NOW

Services provided by a firm of lawyers to any person shall become taxable and legal representation services provided by any person (including individuals) to any business entity shall also become taxable. Similar change is expected to come for chartered accountants and company secretaries.

Arbitration services are also brought into the tax net but still if the same are provided to individuals the same shall not be taxable.

d. COMMERCIAL TRAINING OR COACHING SERVICE

The memorandum issued along-with the Budget says that

“The definition of commercial or training service is being amended to bring all unrecognised courses within the tax net, irrespective of the fact that such courses are conducted by an institute.”

But the consequent change in the section does not reflect the said change – on the contrary – the amended section says that all courses offered by a coaching centre WITH OR WITHOUT ISSUANCE of certificate will be taxable

This anomaly needs to be looked into an corrected before enactment of the Finance Act.

e. Hospital Services

Major change has been made in this entry

EARLIER:

2 Services provided by a hospital were ONLY taxable:

· Services provided to patients wherein the payment was to be paid by the insurance company

· Services of health check up or preventive care provided to an employee of a company wherein the company paid the charges to the hospital

NOW:

The whole section is changed and the new entry provides that

· ALL services provided by a CENTRALLY AIR-CONDITIONED (wholly or partially) hospital having more than 25 beds for in-patient treatment during any part of the year. (The insurance company is completely brought out from the picture)

· If an independent doctor (not being an employee of the hospital) provides his services using the premises of the said hospital will also now become taxable – so now all visiting doctors of a hospital will be taxable.

· Diagnostic services provided by the said hospital with the aid of a laboratory or other medical equipments.

4. Full exemption is being provided under the works contract service for providing construction or finishing of new residential complex under JNNURM and Rajiv Awaas Yojana and within a port or airport. (Earlier this exemption was provided only under the category of Construction of residential complex and commercial construction service.

5. Rates of Service tax on air travel are being increased as under

Domestic Travel - From flat Rs. 100 to 150

International Travel - From flat Rs. 500 to 750

PENAL PROVISIONS

6. Penal provisions are changed in big way in this budget – following is the gist of them:

a. Section 73 (1A) is deleted wherein benefit of reduced penalty of 25% even in case of fraud, collusion etc shall not be available.

b. Instead a new section 73 (4A) is being introduced wherein it has been provided that if during an audit, verification or investigation by the department it is found that the assessee has short paid any tax than a penalty of 1% per month upto a maximum of 25% shall be levied. If the same is paid than no show cause notice shall be issued. So now penalty will become compulsory the moment an audit party finds any short payment of tax which was not so earlier.

c. Penalty under section 76 for delayed payment of tax has been reduced from Rs. 200 per day or 2% per month to Rs. 100 or to 1% per month – whichever is higher subject to a maximum penalty of 50% of the tax amount. Earlier it was 100%.

d. Maximum penalty for non submission of records etc under section 77 has been increased from Rs. 5000 to 10000.

e. Penalty for late filing of returns has been increased from a maximum of Rs. 2000 to 20000.

f. Power to authorise a Search has now been given to a Joint commissioner (Earlier it was with Commissioner) and power to execute the search has been given to a Superintendent (earlier it was Assistant or deputy commissioner)

g. Certain section of the Central Excise Act which deal with prosecution are now made applicable to Service tax.

h. Section 89 is being introduced to bring prosecution provisions:

i. The prosecution shall apply in the following cases:

· Provision of service without invoice

· Availment and utilisation of credit without receipt of inputs or input services

· Submitting false information

· Non-Payment of collected amount of service tax for a period of more than 6 months

ii. The term of the imprisonment shall be from 6 months to a maximum of 3 years.

iii. The sanction for the prosecution will be granted at the level of chief commissioner

The Board has issued 18 notifications to being some more changes which are as under:

a. New Rule 2A has been introduced in Works contract Composition rules whereby Service providers availing the Composition scheme shall now be eligible to take only 40% of the credit of the following 3 input services availed by them:

· Erection commissioning and installation Services

· Commercial Construction Services

· Construction of Residential Complex Services

Please note that this restriction shall apply only if the value of the said input services is inclusive of value of goods.

b. In the earlier budget notification nos. 28/2010, 38/2010 & 42/2010 were issued wherein exemption to Construction of complex & Commercial construction service was given respectively for providing services to JNNURM and Rajiv Awaas Yojana schemes but a similar exemption was not provided to Works contract service. This anomaly has now been corrected by introducing notification no. 6/2011, 10/2011 and 11/2011.

c. Export Rules have been tweaked a bit :

i. Preferential Location services offered by builders has been shifted from customer location based criteria to immovable property criteria

ii. Following services have been shifted from the performance based criteria to location based:

· Credit Rating Agency

· Goods Transport Agency

· Market Research Agency

· Opinion Poll Agency

· Technical Testing and analysis

· Transport of Goods by air

· Transport of Goods in containers by railways

iii. Following Services have been shifted from Location based criteria to performance based:

· Rail Travel Agent

· Health/Hospital Services

d. Import Rules have also been amended. Amendments similar to the ones made in Export rules are made in import rules.

e. Interest on delayed payment which was 13% p.a. earlier has now been increased to 18% p.a. w.e.f. 1.04.2011.

f. New Notification no. 17/2011 is introduced which supersedes the earlier notification no. 9/2009 which deals with SEZ refunds. It simplifies the refund rules and procedures related to SEZ’s.

g. Point of Taxation Rules has been introduced whereby specific rules as to when a particular transaction would become taxable have been prescribed (at the time of invoicing or at the time of receipt of payment). A detailed note on the same is under process and will be mailed very soon.

CHANGES IN CENVAT CREDIT RULES

CENVAT credit rules have been amended in a big way and following changes are made to it:

a. Definition of Capital goods has been amended. Now credit of capital goods used outside the factory of the manufacturer for generation of electricity for captive use within the factory will be available.

b. Major change has been brought about in the definition of exempted services. Effect of 2 changes made in the definition are as under:

· Services on which a service provider has claimed abatement will now be considered as exempted services

· Value of trading in goods shall now be treated as exempted services.

c. Definition of Inputs (goods) has been changed and now credit of goods used for construction of building or a civil structure or laying of foundation will not be available except if the goods are used for providing following services:

· Port Services

· Airport Services

· Commercial Construction Services

· Residential Construction Services

· Works Contract Services

d. Definition of Input Services has been amended and following changes are incorporated:

· Credit for setting up of an office, factory or premises of service provider shall not be available

· The words “activities relating to business” have now been deleted from the definition so now credit of ALL services procured for doing the activity of business will not be available on A-la-carte basis.

· Credit of services falling in the category of Architect, Port, Other port, Airport, Commercial Construction, Residential construction and Works Contract (Specified services) shall not be available if the same are used for construction of building or a civil structure or laying of foundation. If these services are used to provide the same specified services than the service provider can claim the credit thereof.

· Services falling in the category of General Insurance business, Cab operator, Authorised Service Station and supply of tangible goods so far as they relate to motor vehicle except when used by a service provider falling in the category of courier, Cab operator, Cargo handling, Transport of goods by road, outdoor catering and pandal and shamiana keeper.

· Credit of services falling in the category of outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee will not be available henceforth.

e. Rule 3 is being amended retrospectively w.e.f. 18.04.2006 to provide that credit of tax paid under section 66A shall be available – A long awaited amendment and thanks to him its RETROSPECTIVE.

f. Rule 4 (7) is being amended to provide for reversal of credit in case any payment made for any input service is received back

g. Rule 6 is amended to :

- Reduce tax payable on exempted services from 6% to 5%

- Provide an option to keep separate accounts for inputs alone and reverse the amount of input service credit as per the allocation formulae in Rule 6 (3A).

- Rule 6 (5) is omitted – so now credit of 16 services which was available without restrictions will not be available.

CONCLUSION AND SUGGESTIONS

In his speech the Finance Minister said and I Quote:

“The strength of a good value-added-tax lies in the free flow of the credit of the tax paid at the previous stage. Due to complexities, there have been many legal disputes on the availability of credit on a number of inputs or input services. These provisions are being rationalized by laying down clear definitions so that the scope of inputs and input services that are eligible and those that are not, is clear. Allocation of CENVAT credit to exempt and taxable goods and services is also being streamlined.”

Above changes may sound as the finance minister says ‘rationalization’ but the truth of the matter is that in the garb of rationalization the minister has changed the definition in such a way that many of the legitimate credits will now be lost and the basic principle of Value added taxes will be destroyed giving rise to many new litigations.

I hope the feedback to the finance minister’s budget proposals is strong enough to make him change his mind especially on 3 counts:

a. To scrap the levy of service tax on hotel industry when it already faces heavy taxes under state laws.

b. To give abatement option to hospitals

c. To change the definition of input and input services so as to enable the manufacturers and service providers avail credit on construction expenses incurred by them. Construction is a major expense for some of the service providers especially hotels and hospitals.

d. Trading cannot by any stretch of imagination be termed as a service leave alone it being exempted. Question may arise that if the finance minister thinks today that trading is an exempted service can he not say tomorrow that it is a taxable service and start taxing it. It is a frivolous move which will create a big anomaly for those service providers who have trading businesses as well.

e. Re-introduce rule 6(5) of the CENVAT credit rules because there are many input services which cannot be bifurcated strictly between taxable and exempted services.

DISCLAIMER

The analysis/views in this booklet do not purport to be and should not be treated as legal opinion. Nothing contained herein can substitute appropriate legal opinion in fact specific situations that affect you or your enterprise.

Formulated by:

Nitesh Jain

N.J. Jain & Associates

Fourth Floor, Dev Complex,

CG Road, Ahmedabad

+91 79 40022629

+91 98241 82629

www.niteshjain.co.in

Blog: http://servicetaxnitesh.blogspot.com/

Impact of Certain Amendments in Finance Act, 2010

2010-07-12T10:38:00.003+05:30

Introduction

In the recently notified Finance Act all services provided within the airport will w.e.f. 1.07.2010 be classified as ‘Airport Services’ – hence all services including Commercial Construction Services (CCS) and Works Contract Services (WCS) will be now classified as airport services.

In the individual sections of CCS and WCS – providing services to airport is not taxable but due to the amendment all these services will now fall in airport services category and in that section there is no such provision for exemption to these services.

For this notification 42/2010 dated 28.06.2010 was issued which has given an exemption to CCS services but WCS services have not been considered for such an exemption due to which all WCS service providers which were till now exempt will have to now start paying tax – which I deem is not the intention of the Board.

Legislative Background

The Civil Aviation sector and more specifically the Airports in India is one of the areas where the Government of India has made certain special efforts to create a better and robust infrastructure. For this one part was to exempt the airport builders in various sub-sectors like roads, airports from the levy of Service Tax.

The Finance Act, 1994 has 2 sections which cover the whole gamut of construction activity which are:

A. Commercial or Industrial Construction Service [Section 65 (105) (zzq) read with section 65 (25b)] which is reproduced as under:

Section 65 (105) (zzq)

Taxable service means any service provided or to be provided —

(zzq) to any person, by any other person, in relation to commercial or industrial construction service;

Section 65 (25b)

(25b) “commercial or industrial construction service” means—

(a) construction of a new building or a civil structure or a part thereof; or

(b) construction of pipeline or conduit; or

(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,

which is—

(i) used, or to be used, primarily for; or

(ii) occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in,

commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;]

B. Works Contract Service – Section 65 (105) (zzzza)

Taxable service means any service provided or to be provided —

(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation.—For the purposes of this sub-clause, “works contract” means a contract wherein,—

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,—

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;

As can be seen the infrastructure sector is broadly out of the ambit of the definition of these two levies including the airports.

In case of Ports the Board had issued a blanket exemption notification no. 25/2007 dated 22.05.2007 which came into effect on 1.06.2007. This notification exempted CCS as well as WCS services provided to ports and other ports.

So it can be concluded that till 30.06.2010 all CCS or WCS services provided to or within the airport or port or other ports was not taxable under the service tax law.

Amendment made:

Finance Act, 2010 was amended and one such amendment relates to Airport and port services – the relevant text of the amendment is as under:

Old Section:

65 (82)

“port service” means any service rendered by a port or other port or any person authorised by such port or other port, in any manner, in relation to a vessel or goods;

65 (105) (zzl)

to any person, by other port or any person authorised by that port in relation to port services, in any manner;

65 (105) (zzm)

to any person, by airports authority or any person authorised by it, in an airport or a civil enclave;

After amendment w.e.f. 1.07.2010

65 (82)

“port service” means any service rendered within a port or other port, in any manner;’;

65 (105) (zzl)

“(zzl) to any person, by any other person, in relation to port services in other port, in any manner:

Provided that the provisions of section 65A shall not apply to any service when the

same is rendered wholly within other port;’’;

65 (105) (zzm)

(zzm) to any person, by airports authority or by any other person, in any airport or a civil enclave:

Provided that the provisions of section 65A shall not apply to any service when the

same is rendered wholly within the airport or civil enclave;”;

Above amendment was brought about in the recent budget 2010. These amendments were meant to minimise the classification issues that were arising because the old sections were general in nature. In other words all services provided by persons who were authorised by port or airport were termed as ‘Port Services’ or ‘Airport Services’. So if a Warehousing service provider who was authorised to provide warehousing inside the port was falling under both ‘Storage & warehousing services’ as well as Port services.

These amendments are two fold:

a. All persons providing services within the port or airport services to any other person shall now become taxable.

b. All these persons shall now be classified under ‘Port Services’ or ‘Airport Services’.

In the logical corollary of the above interpretation all persons who were providing CCS or WCS services to the airports or ports shall now loose their core classification and fall into either of the 2 categories as enumerated above and consequently also loose the exemption of non taxability of providing services to airports and ports which was available to them hitherto.

To correct this anomaly the government issued notification no. 38/2010 and 42/2010 dated 28.06.2010 which provide exemption to CCS services provided within the port or airport respectively.

The point of representation lies herein.

The exemption which was previously available to both CCS as well as WCS is now only extended to CCS providers and WCS providers are w.e.f. 1.07.2010 made taxable if they provide services to these 2 categories of customers.

This cannot be the intention of the legislature or for that matter of the Board.

All people who follow the Service Tax law will understand the anomaly and its impact if not corrected on time.

Comments are invited.......

CA Nitesh Jain

nitesh@niteshjain.co.in

Brief Writeup on changes made in Service Tax Law by Budget 2010

2010-02-26T19:37:00.008+05:30

Gist of Amendments in existing Service tax law

No change in the rate of service tax – it remains at 10.30 %
Service tax on the real estate sector has been introduced in a new avatar whereby from the date to be notified sale of commercial or residential property by the builder or any other person authorised by him shall be taxable if the builder or person authorised by him receives any payment before receipt of construction completion certificate from competent authority. In other words if in cases of sale of real estate (residential or commercial) where any sum of money is received by the builder from the prospective buyer before receiving the construction completion certificate then such entire transactions shall be taxable. If this becomes law the real estate Construction sector is going to witness a big shock. Further details if any are awaited.
The ambit of Port Services has been reduced to include only those port services provided within the precincts of the port.
Retrospective amendment has been introduced to tax all commercial training or coaching service providers irrespective of their constitution or whether or not they make profit. This amendment is applicable from 1st July 2003. Hence all charitable organizations providing commercial training services shall now become taxable and that too on their entire earning since 1st July, 2003. Moreover definition of vocational training institute has been changed (vide notification no. 3/2010) whereby w.e.f. 27.02.2010 only those institutes which affiliated to the National Council for Vocational Training, offering courses in designated trades as notified under the Apprentices Act, 1961(52 of 1961) shall on be tax free.Prior to this budget sponsorship services were taxed only in the hands of body corporates or firms. Now the ambit of sponsorship services has been extended to include all persons receiving such services.
Earlier sponsorship services in relation to sports events were exempt from tax which now would become taxable from the date to be notified.
Previously service provided by aircraft operators to passengers flying to international destinations on classes above economy class was taxable. Now the domestic travel as well as international travel services provided by aircraft operators shall be liable to service tax irrespective of the class chosen to travel. Now on Domestic travel will become dearer by 10.3%.
An explanation has been added to section 65 (105) (zzzr) (for Auctioneers Service) which declares that “auction by the Government” means the Government property being auctioned by any person acting as auctioneer.
Retrospective amendment has been brought in w.e.f 01.06.2007 to negate the fallout of Delhi HC decision in case of Home Solutions. The activity of 'renting itself' becomes taxable service from 01.06.2007. So all hopes of a favourable order from the Supreme Court have been negated with this retrospective amendment.
From the date to be notified leasing of vacant land for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce shall also be taxable.
Earlier information technology software services were taxable only if the same were provided for use in business or commerce. This major requirement has now been done away with & now these services shall be taxable irrespective of the purpose thereof hence from now on software related services provided for use in Education or religious purposes shall also become taxable.
An explanation to section 73 (3) of the finance act has been added so as to declare that if service tax & interest are paid before issuance of SCN then no penalties shall be leviable. Earlier this section provided only that if the tax & interest were paid prior to issuance of SCN then in those cases no SCN shall be issued.

New services brought under the tax net:

Services provided by Hospitals, nursing homes or multispecialty clinics providing services in the following cases have now been made taxable from the date to be notified:
a. To an employee of any business entity, in relation to health check-up or preventive care, where the payment for such check-up or preventive care is made by such business entity directly to such hospital, nursing home or multi-specialty clinic; or
b. To a person covered by health insurance scheme, for any health check-up or treatment, where the payment for such health check-up or treatment is made by the insurance company directly to such hospital, nursing home or multi-specialty clinic;
Hence treatments provided to any person under the cashless facility offered insurance companies would now become taxable. It would be pertinent to note that if treatments are provided where payments are not made directly to the hospitals shall not be taxable. In other words if the same are reimbursed to the insured it shall not be liable to tax.
Services provided to any business entity, by any other person, in relation to storing, keeping or maintaining of medical records of employees of a business entity shall now become taxable;
Promotion, marketing or endorsement of brand of goods, services, event, tradename, logo or housemark of a business entity shall now become taxable.
Services provided by way of granting the right or by permitting commercial; use or exploitation of any event including an event relating to art, entertainment, business, sports or marriage shall be made taxable from the date to be notified;
Services provided by an approved electricity exchange in relation to trading, processing, clearing or settlement of spot contracts, term ahead contracts, seasonal contracts, derivatives or any other electricity related contract shall become taxable;
Services provided by way of transferring temporarily; or permitting the use or enjoyment of, any copyright defined in the Copyright Act, 1957, except the rights covered under sub-clause (a) of clause (1) of section 13 of the said Act;” shall now become taxable;

Builders selling residential or real estate properties whereby they charge an extra amount to provide any preferential location or development of such property to any buyer, such extra charge shall now be leviable to service tax.

DISCLAIMER

The analysis/views in this booklet do not purport to be and should not be treated as legal opinion. Nothing contained herein can substitute appropriate legal opinion in fact specific situations that affect you or your enterprise.

Nitesh Jain

Chartered Accountant

http://www.niteshjain.co.in/

New Circular for CHA 119/13/2009

2009-12-22T15:17:00.004+05:30

New twist in the tale – now the board is issuing circular having retrospective effect – isn’t it ironical – neways its none of my concern – the twist is that now the circular has prescribed 7 conditions and if they are fulfilled – reimbursable expenses collected by CHA’s will not be taxable.

On going thru them it seems that the purpose of issuing the circular (which is to reduce litigation) will not get solved because of one condition alone (coloured in blue). All CHA (atleast those whom I know) have a markup on actual expenses incurred by them.

So in a nutshell nothing much will change for want of “actual basis” condition. And as said above this circular is applicable from 19.04.2006 – can somebody tell me how can circulars be retrospective – does the act provide for it.

CIRCULAR NO 119/13/2009-ST, Dated : December 21, 2009
Subject : Service tax valuation issues pertaining to Customs House Agents Service-reg.

Customs House Agent’s (CHA) Services are taxable since 15th June 1997. As per the definition (section 65 (105) (h) of the Finance Act, 1994) the ‘taxable service’ means any service provided or to be provided to any person, by a custom house agent in relation to the entry or departure of conveyance or the import or the export of goods and the term ‘service provider’ shall be construed accordingly. Further, as per definition appearing under section 65(35) of the aforesaid Act, a ‘custom house agent’ means a person licensed, temporarily or otherwise, under the regulations made under sub-section (2) of section 146 of the Customs Act, 1962. The Custom House Agents Licensing Regulations, 2004, made under the said section, prescribe the procedure for grant of license by the customs department. They (regulation no. 13) also place obligations on such license holders during their interface with customs department pertaining to customs formalities for conveyance or imported or export goods. In sum, the above provisions read in harmony, show that the activities of a CHA i.e. pertaining to customs formalities in relation to the entry or departure of conveyance or the import or the export of goods, is subjected to service tax under CHA services.

02. While the principal job of a CHA is to get the import or export consignments cleared through customs, they, being the ‘persons on the spot’, also at times arrange services for packing, unpacking, loading, unloading, bringing or removing the goods to or from the customs area, vessels or aircrafts for their customers (i.e. importers or exporters). These services are provided by different agencies such as Port Trust, Steamer Agents, Cargo Handlers, Warehouse-keepers, Packers, Goods Transport Agents. Normally the CHAs initially pay the service charges to these agencies and later recover these charges from the customer along with their own charges CHAs. Similar arrangement can occur for payment of statutory levies like Custom Duties, Port charges, Cesses etc. leviable on the said goods.

03. Issue was raised at the initial stage itself as to whether the charges, which are said to be paid by the CHAs and later recovered from the customers (i.e. reimbursable charges) should be added to the value for charging service tax from CHAs. Through the circular F.No.B-43/1/97-TRU, dated 06.06.1997 the Board had clarified that the service tax would be charged on the ‘service charges only’ and statutory levy and other reimbursable charges would not be included in the taxable value. It was also provided that in case there are lump sum payments towards the reimbursable as well as service charges, service tax would be charged on 15% of the gross value only.

04. In 2006 (w.e.f. 19.04.2006) the Service Tax (Determination of Value) Rules were prescribed. Consequently all previous circulars relating to valuation were withdrawn. The said rules brought in the concept of ‘pure agent’ and provided that expenditure or costs incurred by the service provider as pure agent alone will be eligible for exclusion from taxable value.

05. It is reported that disputes have arisen on the issue of inclusion of such reimbursable charges, which are currently pending at various stages of dispute settlement mechanism. Certain field formations have also issued communications, directing that charges on certain activities incurred by CHAs are not covered under exclusions available to ‘pure agent’. It is also reported that divergent practices as regards the records & documentations, are being followed by the CHAs in relation to the charges for receiving services from other service providers as well as to their billings to their customers. This has added to the conflict and litigation.

06. With a view to resolve the disputes and to bring it clarity, the issue has been examined. The divergent practices followed at different places and lack of consistency in the manner of maintaining records and issuance of documents by the CHAs, make it impossible to lay down any specific guidelines or issue any specific directions. In the circumstances, it is clarified that essentially, the exclusion should be allowed to such charges from the taxable value of CHA services, where all the following conditions are satisfied,-
a) The activity/service for which a charge is made, should be in addition to provision of CHA service (as mentioned in paragraph 1);
b) There should be arrangement between the customer & the CHA which authorizes or allows the CHA to (i) arrange for such activities/ services for the customer; and (ii) make payments to other service providers on his behalf;
c) The CHA does not use the activities /services for his own benefit or for the benefit of his other customers;
d) The CHA recovers the reimbursements on ‘actual’ basis i.e. without any mark-up or margin. In case of CHA includes any mark-up or profit margin on any service, then the entire charge (and not the mark-up alone) for that particular activity/ service shall be included in the taxable value;
e) CHA should provide evidence to prove nexus between the other (than CHA) services provided and the reimbursable amounts. It is not necessary such evidence should bear the name or address of the customer. Any other evidence like BE No./Container No./ BL No./ packing lists is acceptable for the establishment of such nexus. Similar would be the case for statutory levies, charges by carriers and custodians, insurance agencies and the like;
f) Each charge for separate activities/services is to be covered either by a separate invoice or by a separate entry in a common invoice (showing the charges against each entry separately) issued by the CHA to his customer. In the latter case, if certain entries do not satisfy the conditions mentioned herein, the charges against those entries alone should be added back to the taxable value;
g) Any other miscellaneous or out of pocket expenses charged by the CHA would be includable in the taxable value for the purposes of charging tax on CHA services.

07. The conditions mentioned at paragraph (06) would be applicable for services provided with effect from 19th April 2006, i.e. after the introduction of the valuation rules. For the prior period, the taxable value should be determined in accordance with the prevailing instructions issued Board as referred to foregoing paragraph 03 of this circular. Any communication issued by any of the subordinate offices which are contrary to the conditions referred to in paragraph

06 of this circular, or as the case may be, the prevailing Boards circulars stands superceded to the extent of the contradiction.

08. The pending disputes may be settled in terms of this circular.

09. Hindi version follows.
F.No.332/36/2008-TRU

Taxation of Reparing of Roads - a new twist in the tale

2009-07-28T13:32:00.001+05:30

This ongoing saga of taxation on repairs and maintenance of roads has now taken a new twist – which in my understanding is regressive and should be abhorred. The issue which is and was crystal clear – in other words the Act clearly says that repairs of roads and other specified infrastructural facilities is not taxable at all still the government went ahead and made the same taxable by issuing an illegal circular(no. 110/2009 dt. 23.02.2009). Now the government has tried to back track and has issued an exemption notification (no. 24/2009 dt. 27.07.2009).

It is an accepted legal maxim that – what is not taxable by the Act cannot be taxed by a circular – so I guess this notification creates a farcical situation whereby it says something whereas it means something else. Let me explain.

1. It says that repairing of roads service will not be taxable w.e.f. 27.07.2009 – which if accepted would mean that the same activity was taxable from 16.06.2005 to 26.07.2009 – this in itself is ridiculous.
2. Secondly this notification exempts only roads from the purview – what about Dams, Transport terminals airports etc.

Hence in my view this notification is also as was the earlier circular void ab initio and will be struck down by tribunals in the foreseeable future for reasons discussed above.

Nitesh Jain
www.niteshjain.co.in
Email - nitesh@niteshjain.co.in

Implication of High Court Order on Renting of Immovable Property Services !!!

2009-06-05T17:13:00.002+05:30

Introduction:
Service Tax as everyone knows is by far the most evolving taxation law in India today. This evolution sometimes is good as changes required by trade can be included at the right stages without creating much problem for the end user. But an unnecessary by - product of this evolution process is that it gives a lot of chance to the judiciary to interpret the law in terms that the executive may not have imagined.
One such instance of this constant evolution has arisen due to the order of the Honourable Delhi High Court in case of Home Solution Retail India Ltd. vs. Union of India [2009] 20 STT 129 (DELHI) dated 18.04.2009 wherein Justice Shri Baddar Durrez Ahmed has passed an order thereby nullifying the whole tariff entry of section 65 (105) (zzzz) and 65 (90a) of the Finance Act, 1994 as far as Renting of Immovable Property Services are concerned.
This article makes a humble attempt to de-mystify the above order and explain its practical and legal aspect for the members at large.

Legislative Background:
Finance Act, 2007 introduced a new tariff head wide section 65 (105) (zzzz) which was given assent by the President on 1.06.2007. This section introduced a new service category popularly known as the Renting of Immovable Property Services.
This section authorised levy of service tax on Services in relation to Renting of Immovable Property for use in the course of furtherance of business or commerce.
Consequently notification no. 24/2007 dated 22.05.2007 was issued saying that,
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of renting of immovable property, referred to in sub-clause (zzzz) of clause (105) of section 65 of the Finance Act, from so much of the service tax leviable thereon as is in excess of the service tax calculated on a value which is equivalent to the gross amount charged for renting of such immovable property less taxes on such property, namely property tax levied and collected by local bodies
There was a vast difference between the language of section 65 (105) (zzzz) where services in relation to renting were made taxable whereas in this notification the service OF renting were perceived to be made taxable. This issue of difference in language was also raised in the appeal filed by Home Solutions in the Delhi High Court.
Many sections were hit hard by this new tax and they protested by filing Special Civil Applications in various High Courts around India saying that the section itself was un-constitutional and therefore needs to be quashed as void-ab-initio. Many High Courts responded by giving interim stay orders restraining the Service Tax authorities from collecting service tax from the appellants. Gujarat High Court has also given stay orders in the following cases:
Iskrupa Mall Management Company Pvt. Ltd. Vs Union of India - SCA No. 5269 of 2008
where the honourable court has said;
“Notice as to interim relief returnable on 22nd April 2008. Notice to the learned Attorney General returnable on the same day, viz. 22nd April 2008. Till the returnable date, the respondents shall not make any coercive recovery of the Service Tax in respect of the amount of licence fees for the use of the immovable property in question”
Same interim relief is also granted by the Gujarat High Court in case of
1. Fun Multiplex Pvt. Ltd. vs Union of India - SCA No. 9935 of 2008
2. Saffron Traders vs Union of India - SCA No. 8176 to 8179 of 2008

Certain other High Courts like the Bombay High Court, Andhra-Pradesh High Court and Madras High Courts to my knowledge have also given interim reliefs to the petitioners.

Legal Importance of Delhi High Court Order:
I believe that most of the above cases if not all are pending with the Apex court and it has not passed any order till now on the impugned subject.
Meanwhile the on 18.04.2009 the Honourable Delhi Court has now passed a Final order on the issue in the case of Home Solution Retail India Ltd. v. Union of India [2009] 20 STT 129 (DELHI).
The petitioner had challenged the levy of service tax on renting services on 2 counts:
1. The section authorised taxing ONLY services IN RELATION TO renting of immovable properties and not the service of renting itself.
Alternate Plea
2. The levy was unconstitutional and hence void-ab-initio
The High Court has discussed the issue at length and come to a conclusion that the bare section which goes like this,
65 (105) “(zzzz) to any person, by any other person in relation to renting of immovable property for use in the course or furtherance of business or commerce.
seeks to tax only services which are provided or performed in relation to renting of immovable property like providing air-conditioning or infrastructural support, security etc but the Renting itself would not be a service.
Para 35 and 36 of the Order says as follows,
“35. From this analysis, it is clear that we have to understand as to whether renting of immovable property for use in the course or furtherance of business or commerce by itself is a service. There is no dispute that any service connected with the renting of such immovable property would fall within the ambit of section 65(105)(zzzz) and would be exigible to service tax. The question is whether renting of such immovable property by itself constitutes a service and, thereby, a taxable service. We have already seen that service tax is a value added tax. It is a tax on the value addition provided by some service provider. Insofar as renting of immovable property for use in the course or furtherance of business or commerce is concerned, we are unable to discern any value addition. Consequently, the renting of immovable property for use in the course or furtherance of business of commerce by itself does not entail any value addition and, therefore, cannot be regarded as a service. Of course, if there is some other service, such as air conditioning service provided alongwith the renting of immovable property, then it would fall within section 65(105)(zzzz).
36. In view of the foregoing discussion, we hold that section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course or furtherance of business of commerce would by itself constitute a taxable service and be exigible to service tax under the said Act. The obvious consequence of this finding is that the interpretation placed by the impugned notification and circular on the said provision is not correct. Consequently, the same are ultra vires the said Act and to the extent that they authorize the levy of service tax on renting of immovable property per se, they are set aside.”
On the alternate plea the Honourable court has said,
“37. Before parting with this batch of cases, we would like to observe that we have not examined the alternative plea taken by the petitioners with regard to the legislative competence of the Parliament in the context of Entry 49 of List II of the Constitution of India. Such an examination has become unnecessary because of the view we have taken on the main plea taken by the petitioners as indicate above.”

Following points come out from the order of the Delhi High court:
a. Renting of immovable property per se is not a taxable service in terms of section 65 (105) (zzzz).
b. Services in relation to renting of immovable property are only taxable.
c. Notification 24/2007 dated 22.05.2007 is null and void.
d. Section 65 (105) (zzzz) is not unconstitutional.

Practical difficulties in implementing the High Court Order:
The Delhi High Court has come out with an order saying that Renting of immovable property is not a taxable service at all, however it would be pertinent to note that the High Court has in-effect rejected the alternate plea of the petitioners that the levy is unconstitutional.
There is a lot of excitement in the minds of the tenants and they are taking decisions solely on the basis of the Delhi High Court whereby they have stopped payment of Service Tax to their respective landlords. The landlords are in a catch 22 situation and are unable to decide which course to take as no one knows what future beholds for them in terms of the Supreme Court Order. Otherwise also the Delhi High Court order raises many practical questions for the landlord:
a. Should the landlord stop paying service tax to the exchequer.
b. Should he stop collecting tax from his tenants
c. If he keeps collecting and paying the tax will he be able to get refund of it if the Apex Court rules in favour of the assesses.
There are no easy answers to the above questions, hence the controversy.
The Central Government has already filed an appeal in the Supreme Court wide Special Leave Petition (Civil) 13850 of 2009. Thus the ball has been set rolling. It may take 2 or 3 years for the Supreme Court to give its final order – until that comes the above questions will keep haunting.
Meanwhile the Government also has chance to amend the sections retrospectively as was done in case of GTA Services. For example, in the case of GTA, the Supreme Court in the case of Laghu Udyog Bharati v. Union of India [2006] 4 STT 322 has held that recovery of service tax from the service recipient is ultra vires of the law. Thereafter, the Central Government brought retrospective amendment to validate the levy and deny refund claim by the Finance Act, 2000 and the Finance Act, 2003. The Finance Minister if provoked will not miss the chance once again. What does this leave the landlord with.

Conclusion:
Following practical solutions can be proposed:
1. Collect the tax from the tenant and pay the same to the exchequer “under protest” with a written undertaking to the tenant that in case the supreme court passes an order in favour of the assessee than the landlord shall apply for refund under section 11B of the Central Excise Act r.w.s. 83 of the Finance Act, 1994 and once the refund is granted the same will be refunded back to the tenant. I propose to pay the tax under protest because refunds of taxes paid under protest do not get time barred. In my view doctrine of unjust enrichment will not apply in this case because the tax is collected expressly under an undertaking to refund the same if refund is granted.
2. Stop collection of tax from tenant and payment thereof to the government and take a written undertaking from the tenant that in case the Supreme court passes an order in favour of the Central Government or if the government changes the law retrospectively the tenant will indemnify the amount of tax as well as interest to the landlord.
The first option will save the interest cost as well as the hassle of collection of taxes later from the tenant which in my view is a bigger problem.
Above solutions if accepted will give rise to newer problems for tenants who are taking credit of the service tax so paid on rent. If the tax itself is indemnified for refund – how can one take credit of the same, and if the tax itself is not paid as per solution 2 than there would be no question of credit. Secondly if the tax becomes payable at a later date – question will again arise as to how to take credit of tax at a future date when the related expense was paid earlier. It would also raise the issue of tenants existence when the final order is passed. In todays fast world tenants keep changing addresses and once the tenant leaves the place – it would be hard to collect tax from him on the basis of the written undertaking alone.
Another solutions that comes to mind is that an Escrow account can be created with an express standing instruction to the bank that unless and until all stake holders say, the money will not be released to any single or multiple entity except to the Central Government. The landlord will amend the lease deed and specify that service tax will henceforth be deposited in this escrow account and the same will not be paid to the Central Government till the Supreme Court order comes or a retrospective amendment is made.
I leave the readers to decide how practical this idea is and whether the same can be implemented successfully.
Nitesh Jain
N.J. Jain & Associates
Chartered Accountants
www.niteshjain.co.in
Email ID - nitesh@niteshjain.co.in

Addendum

2009-04-15T00:54:00.003+05:30

The Blog written on the issue of the recently issued circular on the leviability of Service tax on the activity of Repair of Roads. My interpretation was solely based on pure reading of legislation and many questioned the logic of it. Now the logic presented by me in the said article has been validated by order passed by Commissioner Appeals (Vizag).
The Commissioner held,
As seen from the definition the activity covers construction, completion and finishing and repair, alteration, renovation or restoration or similar services and the definition itself specifically excludes such services provided in respect of roads, airports, railways, transport terminal, bridges, tunnels and dams. From the above it is evident that not only construction services but also repair services provided in respect of roads are exempted from tax. Though the same may also fall under management, maintenance or repair service in terms of Section 65(64) of the Finance Act, 1994, in view of specific exclusion of repair services provided in respect of roads under Section 65( 25b ) of the Finance Act, 1994 the same cannot be subjected to any tax. If the intention of the government is to subject the repair services provided to roads to tax, then the definition given under ‘Commercial or Industrial Construction Service' should have been suitably amended by omitting the words “does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.” Reading the definitions of Commercial or Industrial construction service and management, maintenance or repair services together gives a meaning that repair of roads, airports, railways, transport terminals, bridges tunnels and dams are excluded from service tax liability in view of the specific exclusion provided in Section 65( 25b ) of the Finance Act, 1994. It also implies that management or maintenance of all immovable properties including roads, Airports, transport terminals, railways, bridges, tunnels and dams are liable to tax but not repairs in view of specific exclusion provided vide Section 65 ( 25b ) of the Finance Act, 1994.
The order of the Commissioner is sure to be challenged by Revenue, but the commissioner has opened a new avenue of repair and at least for some time Roads ATLEAST in Vizag can be repaired without service tax.

Changing of law through issuance of circulars !!!

2009-03-18T14:40:00.003+05:30

Introduction:
Law till today on the subject of repairing and maintenance of roads and other infrastructural facilities was clear in the minds of all stake holders (barring a few Service tax commissionerates)
There was this discussion being held in many corners and some queries on this count were being raised that somehow Maintenance and/or repairing of Roads would be a taxable activity but a conclusive view came across from all those corners that no such taxing is possible because the law itself was clear enough.
This view was based on a sound principle of law which says that if a service activity is specifically excluded from the purview of taxation from one service category cannot be included in some other category unless and until specific inclusion thereof is provided for it in that section.
The Central Board of Excise and Customs (CBEC) – has now come up with a Circular No. 110/2009 dated 23.02.2009 clarifying the doubts in respect of levy of service tax on Repair/ renovation/ widening of roads.
The circular has tried to give extra-judicial meaning to 2 sections involved:
1. Commercial or industrial construction service [section 65(105) (zzq)]
2. Management, maintenance or repair service [section 65(105) (zzg)].

Legislative Background:

I. Commercial or Industrial Construction Service:
As per section 65(25b) of the Finance Act, 1994 (Act),
“Commercial or industrial construction service” means—
(a) construction of a new building or a civil structure or a part thereof; or
(b) construction of pipeline or conduit; or
(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or
(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,
which is—
(i) used, or to be used, primarily for; or
(ii) occupied, or to be occupied, primarily with; or
(iii) engaged, or to be engaged, primarily in,
commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;]

As you can see, above defining section clearly spells out that all kinds of repairing, alteration, renovation, restoration or similar services provided in relation to any infrastructural facilities including roads is completely non taxable. Therefore it can be safely said that there was and still exists a specific exclusion from charging of service tax on repairing and related services in respect of roads.

II. Management, Maintenance or Repair Service:
As per section 65 (64) of the Act,
“management, maintenance or repair service means any service provided by—
(i) any person under a contract or an agreement; or
(ii) a manufacturer or any person authorised by him,
in relation to,—
(a) management of properties, whether immovable or not;
(b) maintenance or repair of properties, whether immovable or not; or
(c) maintenance or repair including reconditioning or restoration, or servicing of any goods, excluding a motor vehicle.]
[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this clause,—
(a) “goods” includes computer software;
(b) “properties” includes information technology software;]

This section puts in place a charge on Management, Maintenance or repair services in relation to all movable and immovable goods and properties. This section was first amended w.e.f. 16.06.2005 to include maintenance services in respect of immovable properties and it was further amended from 1.05.2006 to include repairing services thereon also.

Legal Importance of circular:
It is an accepted rule of law that an Act passed by the Parliament is supreme in authority and its provisions cannot be re-defined by issuance of circulars. Circulars can only by guides of law and law cannot be over-defined by these instruments. Many circulars have been struck down by courts. In case of COMMISSIONER OF SALES TAX vs. INDRA INDUSTRIES (2001) 248 ITR 338 (SC), wherein the apex court has opined that,
“A circular by tax authorities is not binding on the Courts. It is not binding on the assessee.”
Hence circulars at best are instruments in the hands of administrators to clear doubts where they exist but unfortunately these are being used to create doubts where none exist.

Defining the Circular
The circular is issued in response to clarification sought by the Nashik Commissionerate on the issue. The circular has tried to clarify 2 issues –
a. Whether management, maintenance or repairs of roads is taxable under similar service head or not.
b. Segregation of activities in relation to roads into 2 distinct heads as under:

i. Maintenance & repair activities
1. Resurfacing
2. Renovation
3. Strengthening
4. Relaying
5. Filling of potholes

ii. Construction Activities
1. Laying of a new road
2. Widening of narrow road to broader road (such as conversion of a two lane road to a four lane road)
3. Changing road surface (graveled road to metalled road/ metalled road to blacktopped/ blacktopped to concrete etc)
In simple language as per this circular all activities of management, maintenance or repairing in respect of roads will be taxable with retrospective effect atleast from 1.05.2006 if not earlier. It has tried to define what activities are classifiable as Maintenance or Repair services and what can be defined as Construction. As there is no legal standing of the circulars – the impact of it cannot be prospective in nature.
If we believe this circular to be sacrosanct than atleast from 1.05.2006 all jobs of resurfacing, renovation, strengthening, relaying or filling of potholes in respect of roads will become taxable.
This can be stretched to mean that if a road is constructed once – all relaying work done on it for as many years to come – would be a taxable activity given that the quality of surface of the road is not changed from graveled road to metalled road/ metalled road to blacktopped/ blacktopped to concrete etc.

Mistake of omission:
The circular fails to recognize one important sub-clause of section 65 (25b) of the Act.
As explained earlier, this section defines the words – “Commercial or Industrial Construction” – wherein sub-clause (d) of section 65 (25b), clearly includes all kinds of repair, alteration, renovation, restoration or similar services. Thereby meaning that repairs is also a sort of Construction.
The definition further has an the exclusion clause which says that,
“but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;]”
The words “Such services” – refer to sub-clause 65 (25b) (a) to (d) – which means that all repairing, renovation etc jobs in relation to roads are NOT TAXABLE at all.
Why was this clause not referred before issuance of the impugned circular is a question that only the Board can answer but according to me it is clear that they have not considered this sub-clause and this mistake of omission would give birth to serious litigation issues for the infrastructure sector as a whole.

Conclusion:
As far as repairing jobs of roads etc is concerned there was no iota of doubt in the legislative intent because Infrastructure is the need of the day and upkeep of the infrastructural facilities is a core area in which the government is working hard, but unfortunately this circular is issued to undo all the good intentions of law.
It is not as if the law is silent on the issue, on the contrary the law is crystal clear and specifically excludes all kinds of repair jobs done in respect of all infrastructural facilities like roads, airports, railways, transport terminals, bridges, tunnels and dams as explained above.
This circular must be withdrawn with immediate effect and all efforts must be taken by all stake holders to force the Central Government into withdrawing it. The circular in any case according to me is Void-ab-initio and will not stand the scrutiny of Tribunals and courts in the long run but till that happens it would have done the mischief it is intended to do. The litigation creating potential of this circular is immense and immediate.
This circular would proverbially open a Pandora’s box for the maintenance and repairing of infrastructural facilities sector as a whole, because the logic of this circular if accepted would mean that similar services in relation to infrastructural facilities other that Roads – like Airports, tunnels dams etc will also be taxable and that too retrospectively.
This Circular has all the right ingredients to do all the wrong things.

Nitesh Jain
N.J. Jain & Associates
Chartered Accountants

FEAR - Now i understand what this word means !!!

2008-11-29T13:56:00.003+05:30

What do terrorists want - they want to instill fear in the masses - their target audience is not the politician sluts but the ordinary public - and for the first time and after so many tragedies - i have started fearing them. Not because they have the weapons but because we do not have the will to fight those weapons.

We are so 'high on spirit' people that we forget that we need to respond not in the same way but in a decent but powerful way - I AM AFRAID BECAUSE WE DO NOT RESPOND - we only talk of responding - of taking suitable action but the promised action is never taken.

The NSG took a good 10 hours to reach the spot of terror - Why ????? who is answerable - why did the police handling the situation carrying only single shot rifles in hand - why werent they wearing bullet proof jackets. there are many such questions and i know for sure that these f...... su........ politicians will have a unique way of dodging these questions because they DO NOT CARE. I hope they come to realise what fear is - many say this - that had some politicians died in any of the terror attacks or taken hostage - then we would have got some concrete actions. But no one from thier class ever dies in these attacks - they live so that we can die. Back to the NSG - the attacks started at 9.15 pm and the NSG started its action at about 8 next morning - i am told that they were informed at 12.00 in the night to move - they were kept waiting at the airport for 2 to 3 hours for a plane to fly them down - then at the mumbai airport they were kept waiting for another 1 hour because some fool had not called in for a bus for them. If this is the standard of planning in India - God save us.

Next question is that more terror strikes have taken place in Mumbai then anywhere else - then why is the NSG not having a permanent base in mumbai. Will any politician of the highest rank - may be the PM or the Home Minister or defence minister asnwer these questions. I will ask question even in this hour of tragedy because some thing grave has happenned and it is repeating itself time and again and our governers keep filling TV studious creating a farce of discussions.

My suggestions for combating terror because i do not want to stop at taking jibes at the political class but also give some ideas :

Have united, robust and sustainable policy to cambat terror
Give the ropes of this policy (implementation) to an upright and Young officer having a good head on his shoulder (mind u not a beaurocrat) to run it
Give all the resources he wants - make that organisation the single window for combating terror - (if we can have a single window for foreign direct investment then why not one agency to combat terror)
Let this organisation have permanent bases in all major cities in India.
Give them full political backing and keep them immuned from the communal politics.
Have meritocracy as its sole guiding force. There should be no interference in their work.
Keep it out from the hands of politician and buearocrat - have an autonomous agency like the Election commission or TRAI to look after its affair - the board should have emminent experts from the relevant fields.
The agency should have its own inteligence gathering capabilities - the latest gadgets should be available to them. May be it should have its own fully equipped research and development wing with a 5000 crores budget.
They should be backed by a democratic but powerful law against terror.
Special fast track terror courts should be run for terror cases alone in all major cities. Judges delaying orders must be punished immidiately. The organisation must be free to take good legal advice from the most emminent lawyers for fighting there side of the case.
Once a death sentence is cleared by the Supreme court than the guilty must be hanged immidiately and the political class should not be allowed to play petty politicis over this.
The Parliament must announce a zero tolerance policy against terror and no government must be allowed to negotiate with hijackers or such hostage takers even if it means endangering the lives of innocent citizens.
They must be allowed to take action which is deemed fit by the agency in foreign land - offcource it may be covert or may be overt. Stop this nonsence that we will not cross the border - this crap will not be taken now.
All diplomatic help must be provided to this organisation.
They will report directly to either the PM or the Cabinet Committee on Internal Security.
This organisation must have Public relations wing which gives credible information to the media.
At the time of terror all the agencies of the state must come its wings - in other words they will take orders from one organisation only.
Joint mock exercises must be conducted with identical forces of major world powers like USA, UK, France, Israel and others to upgrade the training of our men.
Personnel working in this organisation must be given good pay structure with good Insurance policies.
The government must announce a consistent and uniform policy for awarding the ex-gratia amounts to the deceased or injured in terror attacks. The system must be responsive enough to complete the process in a month of a tragedy.
All major facilities of national importance must be charted out - and detailed plans of action in case of terror attacks must be formulated.

I have many such suggestions and i believe there better equipped people out there who suggest much better plans but the issue is that who will bell the cat.

I hope some one in the corridors of power - in the silence of his bedroom - has a tear in his eye - thinks hard about this menance not with eye on the coming press conference and how he will manipulate the vocabulary so that he come unhurt. A thought which guides him to do something drastic about the decease called terrorist. I hope such doctor comes forward and takes the call of his duty.

No one from my family has even come close to such a tragedy and i hope no ones family ever comes close to such events but just hopes wont do any good - this 'spirit of mumbai' cliche will not help us anymore nor has it helped in the past. So get up guys and do something about this or else just keep watching Television and political debates because thats what we are good at - Mera bharat mahan - 100 me se 80 be.............. -

Nitesh Jain

Chartered Accountant

nitesh@niteshjain.co.in

Rent-a-Cab Scheme Operators’ Service – Taxable or Not?????

2008-09-03T12:30:00.002+05:30

Introduction
Service tax on services of providing cabs on rent was first made taxable wide an amendment in the Finance Act, 1997 (taxable w.e.f. – 16.07.1997) wherein the service providers who were license holders under the Rent-a-Cab Scheme, 1989 framed by the Central Government were made taxable – practically not many of these service providers were holding such licenses hence the service did not raise much revenue for the Government. Looking at this the government exempted the whole service from tax w.e.f. 28.02.1999. It remained exempted till 1.04.2004 when it was reintroduced dispensing the requirement of holding a license under the Rent-a-Cab Scheme, 1989 thereby throwing the tax net wide open.
Recent case laws have raised major questions on the applicability of this law to a large section of the service providers. This article deals with this very aspect and tries to find answer to the query of many such service providers. Before going into the merits and demerits of the interpretation of this law, let’s see what is the real modus operandi of the majority of the service providers.

Rent a Cab Business Models
Basically there are three service models which are being followed by the industry at large:
1. Providing cars, maxi-cabs and other small to medium vehicles to the customers on a monthly hiring basis – where the driver & fuel is provided by the service provider if asked for otherwise he charges for the vehicle and rest of the expenses thereon are to be borne by the customer himself.
2. The customer gets the vehicle on per kilometer rate basis – where the driver as well as the fuel is provided by the service provider and customer has to pay for as much as he travels subject some minimum charges.
3. The service provider has his car pools at many places – the customer goes there – chooses a car – pays the refundable deposit as well as the per day or per hour rate for the chosen car and drives the car by himself. In this model the customer himself is responsible for driving the vehicle as well as fuel costs have to borne by him. After his use is over, he parks the car at any company designated parking areas and walks away after getting a refund of the deposit paid earlier.

From the above 3 models the first 2 are prevalent in India whereas the third model is yet to start in a major way.
First model is used by the corporates as well as firms who contract vehicles as per their needs on a monthly rental basis whereas the second model is more prevalent in the tourist industry and for individual customers. Lets examine the existing law covering taxation on this industry

Existing Law
Taxable service in relation to renting of cabs has been defined under section 65 (105) (o) of the Act as follows:
“Taxable service means service provided or to be provided to any person, by a rent-a-cab scheme operator in relation to the renting of a cab;”

Main ingredients that come out from the above section to make a transaction taxable are:
a. The service is provided to any person;
b. The service is provided by a rent-a-cab scheme operator
c. The service is provided in relation to renting of cab

Meaning of the above conditions:
1. The service recipient can be ANY PERSON whatsoever.
2. The service provider has to be a rent a scheme operator and section Section 65 (91) of the Act, defines him as :
“rent-a-cab scheme operator” means any person engaged in the business of renting of cabs;”
Therefore any person who in the normal course does a business of renting of cabs will only be taxable under this section and not everybody who provides vehicles on rent.

3. Third condition says that the service has to be in relation to RENTING of cabs.
This condition is proving to be a major bone of contention for the service tax department whereby the honorable tribunals have interpreted it in way which makes the whole section redundant as far as one chunk of the service providers are concerned.

Fact & Law
As discussed above there are basically 2 models of hiring of small vehicles prevalent in India wherein one is outright renting of cars and the second is piecemeal hiring.
Both the models satisfy the first 2 conditions out of the 3 discussed above. The last condition is where the judiciary has given conflicting views. The definition says that the service must be in relation to RENTING of vehicles.
In the first business model where the vehicle is given on monthly rental basis – it can be said that the car is rented but in the second model where the car is given on kilometer basis the vehicle can at best be termed as hired. Hence the difference is of Renting vs. Hiring.

The American Heritage Dictionary defines these terms as under:
Renting: means payment, usually of an amount fixed by contract, made by a tenant at specific intervals in return for the use of a facility, equipment or service provided by another; to grant temporary occupancy of use of (one’s own property or a service) in return for regular payments.

Hiring: means to grant the services of or temporary use of for a fee.

As can be seen from above definitions that there is a distinct difference between the two words hence the taxability of transaction needs to be understood in the light of these differences.

Similar question was raised in the case of Express Tours & Travels (P.) Ltd. v. CCE, [2005] 1 STT 305 (MUM. - CESTAT) – where the honorable Tribunal opined and I quote,

“I do not see much of a difference in the words Hire and Rent in the context in which they are used. The Rent-a-Cab Scheme would have consistently used the word ‘Rent’, ‘Rental Charges’, etc., instead of ‘hire’, ‘hire charges’ if there is such a big difference between the two expressions. An ‘Yellow & Black’ motor taxi is engaged by a person whereas he hires a tourist taxi much more formally for a longer duration. The Government’s intention is to tax the providers of a service, which involves, hiring/renting of a cab formally for a longer duration.”

It must be said that according to the facts of the case stated above the appellant failed to put across sufficient evidence to prove that it was hiring the vehicles and not renting them hence the tribunal was not in a position to appreciate the difference between the two transactions.
In other cases where enough evidences were put before the honorable Tribunals they gave some contrary views which have confused the issue no bounds.

Judicial views:
One view
1. Shiva Travels v. CCE – Meerut I [2007] 7 STT 75 (NEW DELHI – CESTAT)

The tribunal said that, “if motor cabs are given on rent along with drivers, the nature of service, prima facie, would remain the same as that of rent-a-cab scheme operator."

The Tribunal thus refused to entertain the difference between hiring and renting and considered both the activities as the same which makes all business models taxable under this section. Similar view was taken in the case of Anil Kumar Agnihotri v. Commissioner of Central Excise, Kanpur [2007] 11 STT 59 (NEW DELHI - CESTAT).

The other view

2. Kuldip Singh Gill v. Commissioner of Central Excise [2005] 2 STT 34 (NEW DELHI - CESTAT)
This case has proved to be a landmark where many tribunals have now come across and agreed to the views of the New Delhi CESTAT.

“It is clear from the contract that the Oil Corporation was not renting out any stipulated number of vehicles; but was making payment for operating trips to various places. The vehicle in question continued to be with the operator, including during the time of its operations for IOC. As and when the trips were required to be undertaken, the operator was asked to carry out the same and he was paid per trip depending upon distance, time etc. as per the rate sheet. The important thing to be noticed is that the cabs were not leased out for any interval of time, for use by the Oil Corporation, according to its discretion. That service tax under the heading does not cover all manner of transport or vehicle hire services is clear from the wording of the heading itself. The levy has been defined as “any service provided...... by a rent-a-cab scheme operator in relation to renting of a cab”. In the present case, there was no renting of cabs. Instead, transport service was provided. In view of this, service tax demand on the appellant is not sustainable."

The above view has been followed in the following similar cases

a. Dharmabhakti Travels v. Commissioner of Central Excise, Rajkot [2007] 9 STT 332 (AHD. - CESTAT)
b. R.S. Travels v. Commissioner of Central Excise, Meerut [2008] 15 STT 437 (NEW DELHI - CESTAT)

In this case the tribunal has said that the logic of Express Tours & Travels (P.) Ltd. v. CCE case cannot be accepted in all cases because in that case the appellant had not produced any evidence to suggest that the cars were being actually hired by the customers and not rented.

c. P. Sugumar v. Commissioner of Central Excise, Pondicherry - [2008] 13 STT 72 (CHENNAI - CESTAT) where the tribunal in its order said,

“After going through the records of the case and considering the submissions by both sides, I find that apparently, when the vehicles are not provided to a person on rental basis for any continuous period of time and are only made available for making journeys as and when required, will not come under the ‘rent-a-cab’ scheme. This is also the ratio of the two decisions of the Tribunal cited by the Ld. Consultant. The appellants have made prima facie case against the demand."

Hence the whole premise for taxing of service providers who provide vehicles on kilometer basis and where the driver belongs to them have been declared non taxable by these tribunals across India. This model of business is the most prevalent in India hence these pronouncements would bring a big cheer to these service providers.

Conclusion: The Way forward:

In the Budget 2008 the Finance Minister introduced a new service called the Supply of Tangible Goods whereby he proposed to tax those transaction where rights to use goods were transferred without transferring the effective control and possession. If we again look at the transaction where the vehicle is given to a customer on kilometer basis and assume that the same is not taxable under the Rent-a-Cab services (as the tribunals have suggested) than also from 11.05.2008 the said transaction would become taxable under the new category.

I do accept the principal that what is expressly not taxable under one head cannot purported to be made taxable under other head but the fact remains that if a transaction is being classified as non taxable due to judicial review and on an argument that the earlier section does not in any way cover those kinds of transactions than it would be hard to argue that the principal discussed above has been violated.

Secondly under the Rent-a-Cab scheme service providers enjoy a hefty 60% abatement as per notification no. 1/2006 which would not be available if the same service is made taxable in the new head.

Hence it would be futile for people to now fight for classification from now onwards – but the above service of Supply of Tangible Goods has become taxable only w.e.f. 11.05.2008 hence all service providers who have cases pending at any stage of adjudication can take help of the above cited cases and bring permanent relief for them. The situation will only change if any of the above cases are reversed by a higher court like the High Court or Supreme Court but till then we can take support of the above case laws and find some robust solution to the pending cases.

Nitesh Jain
www.niteshjain.co.in
(Mob.) 9824182629

Attachment of property under service tax

2008-07-02T13:02:00.002+05:30

Introduction:
The soft culture of service tax law is now being demolished and a new harsher face of the taxmen is coming forward.

Notification 30/2008 issued on 1.07.2008 has activated the section 73C of the Finance Act, 1994 whereby attachment of movable as well as immovable property can be undertaken by the authorities. I agree that penal sections are needed in any taxation law but such sections need to be and feel democratic and follow the path of natural justice and must not only smack of being democratic.

The history:
Section 73 C of the Finance Act, 1994 which was introduced by Mr. Chidambram (who else) in 2006 budget whereby he had empowered the tax authorities to attach the properties if required but rules of procedure for the same were not prescribed till now, which he has done - should we suspect that to meet the revenue targets and thereby contain the deficit he is becoming desperate.

The scheme
In the newly introduced notification the power of attachment is eventually given to the highest administrative authority - the Chief Commissioner of central excise who will be sent a proposal by the AC or DC alongwith all details. The CCE will give a hearing to the concerned assessee and if the assessee does not respond within 15 days or if the response does not satisfy the CCE his property is due to be attached.

Shockingly the timing of the beginning the attachment proceedings is what is mind boggling - the attachment procedure can begin as soon as a Show cause notice (SCN) u/s. 73 or 73A are issued. Section 73 in short stands for Wilful suppression, fraud etc and thereby not paying service tax and section 73A deals with unjust enrichment. So even if hearings after the SCN are pending (which hilariously in some cases are pending since 2005) still the authorities can go ahead and attache the properties.

What can be Attached
Many assessee's in such situations ask WHAT CANNOT BE ATTACHED - i will answer that in a moment.

The attachment can be of Movable as well as immovable property of the assessee in default.
The authorities can attache only that much property which covers the Service tax demanded. It does not call for attachment covering the interest, Penalty etc.
First the movable property like Cars, Investment etc will be liable to be attached and if that is not sufficient to cover the service tax portion that ONLY the immovable property will be attached.
The personal property of the PROPRIETORS, PARTNERS AND DIRECTORS shall NOT be attached. (How on earth is personal property of proprietor different from his proprietary concern is hard to understand - the writers of law are people from mars it seems)

Period of Attachment

The Attachment will be enforceable only upto 6 months from the date of the service of the initial order of attachment. The CCE may for reasons to be recorded in writing extend the attachment further but the total period of extension shall not exceed 2 years. Hence the total attachment period cannot in any circumstances exceed 2 years and 6 months.

Conclusion:

Since the days of the introduction of service tax till 10.09.2004 (the date when the first budget of Mr. Chidambram came in to effect) - we consultants found it hard to find clients as they said that Service tax is very easy and can be handled by our internal staff - Sir those days are now gone.......sadly the earning hand of government is unfortunately being given teeth where they are not required. I sincerely hope it dawns on them that such rules must be left unissued.

Nitesh Jain

www.niteshjain.co.in

Implication of new service category – Supply of tangible goods – on the Transport Industry.

2008-06-13T16:23:00.004+05:30

Introduction

The Budget 2008 was introduced on 29.02.2008 wherein certain new services were proposed to be brought under the service tax net. This was a customary step taken by the Finance Minister (FM) as is done every year.

The experts and the common public at large has now come to understand very well that the devil of the budget is in the fine print especially in case of budgets drafted by Mr. Chidambaram.

This year there has been one such aberration which in my opinion can become a real problem for the transport industry as a whole, it is in the case of introduction of new section 65 (105) (zzzzj) in the Finance Act, 1994 wherein the services provided in relation to Supply of tangible goods by any person to any other person have been made taxable with effect from 16.05.2008.

Brief understanding of the new section ?

The section thus reads as follows:

Taxable Service means services provided or to be provided:

“to any person, by any other person in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances;”;

From the above section there are 3 ingredients which come to notice:
The service essentially has to be in relation to supply of tangible GOODS to any person by any other person;
there must not be any transfer of right of possession of the goods from the service provider to the service recipient;
there must not be any transfer of effective control of the goods from the service provider to the service recipient.

Hence if the above 3 criteria’s are fulfilled in a commercial transaction than the same would be liable to service tax from 16.05.2008.

Lets dissect the said section further by exploring the meaning of important words used therein:

TANGIBLE GOODS:

Meaning of tangible in law “is the attribute of being detectable with the senses”.

Goods has not been specifically defined in the Finance Act, 1994 but as per section 65 (50) thereof the meaning as assigned to it in section 2 (7) of the Sale of Goods Act, 1930 shall be taken. Goods there have been defined as under:

"goods" means every kind of moveable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

Therefore all things which are movable except money and actionable claims can be categorized to be GOODS.

In the same line one can safely conclude that TRUCKS are both – tangible and goods.

RIGHT OF POSSESSION AND CONTROL:

In general practice Possession has been the meaning - “exclusive practical control of a thing, in the context of the legal implications of that control”

Similarly Control can be taken to mean “the power to influence people’s behaviour or the course of events”

Summarization of the whole meaning and where it leads us:

It can be clearly understood from the above discussion that all kinds of supply/lease/renting of goods which also include machinery, appliances and equipments FOR USE will be taxable from 16.05.2008 given that the service provider does not transfer the right of possession and effective control to the service recipient.

Lets understand the same through an example:

A company is providing computers on rental basis to its clients for a period of 6 months for a consideration of Rs. 1500/- per computer per month. Here the company has supplied/provided computers on rent and computers are Goods but as can be noticed that the owner of computers has also parted with the right of possession and effective control in favour of the user because the user will having unchecked – unhindered possession of the computers. So the above transaction satisfies only 1 criteria out of the 3 mentioned above and therefore the same would NOT be liable to service tax.

But imagine in the same transaction if the computers are supplied alongwith manpower to help the user use them and has stipulated in the contract that no one other than his personnel would use those computers – in other words the owner company is providing computers as well as manpower to operate under one single contract than in that case it can be safely said that all the three criterias are fulfilled and the transaction shall become taxable from 16.05.2008.

Service tax Vs. VAT

The Board has come out with any internal circular/letter F.No. 341/1/2008 dated 29.02.2008 which is issued to its rank and file wherein it has tried to define the differential nexus between supply of goods in the case of VAT (Sales Tax) and service tax.

In paragraph 4.4.1 thereof the Board has said,

4.4.1. Transfer of right to use any goods is leviable to sales tax/VAT as deemed sale of goods [Article 366 (29A) (d) of the Constitution of India]. Transfer of right to use involves transfer of both possession and control of the goods to the user of the goods.

4.4.2 Excavators, wheel loaders, dump trucks, crawler carriers, compaction equipment, cranes etc., ………………… are supplied for use, with no legal right of possession and effective control. Transaction of allowing another person to use the goods, without giving legal right of possession and effective control, not being treated as sale of goods, is treated as service.

4.4.3 Proposal is to levy service tax on such services provided in relation to supply of tangible goods, including machinery, equipment and appliances, for use, with no legal right of possession or effective control. Supply of tangible goods for use and leviable to VAT/sales tax as deemed sale of goods, is not covered under the scope of proposed service. Whether a transaction involves transfer of possession and control is a question of facts and is to be decided based on the terms of the contract and other material facts. This could be ascertainable from the fact whether VAT is payable or paid.

The above words coming from the Board itself can be termed as a good definition of what is taxable and what is not and the premises on which each transaction needs to be evaluated.

The last line in the board circular is very important because it concludes by saying that whether a transaction is taxable or not can be evaluated by considering the facts that the assessee in question is paying VAT/sales tax on the value of the transaction or not, if he is not paying VAT than in that case he ought to be paying Service tax.

Applicability to Truck owners

After discussing the provisions in their entirety I will now come to the main reason for writing this article. It relates to the applicability of the above discussed section to the transactions entered into by the transport industry as a whole. It would be prudent to note that the modus operandi discussed hereunder is followed by not less than 60% of the industry. It makes a small thing big when compared with the humongous size this industry is and its direct relation with the inflation cycle of the Indian Economy as a whole.

Modus Operandi of transport industry:

Lets take a hypothetically situation to understand the way the transport industry works in India:

A Company XYZ wants to send some goods from Ahmedabad to Bombay and hence contacts a Booking agent (BA) to help him do so. The BA in turn contacts a Truck Owner (TO) to send him a truck with a driver and cleaner for the said journey.

The Truck owner asks for Rs. 10000/- from the BA and the BA in turn asks for Rs. 11000/- from the XYZ company. The consignment note in the above example will issued by the BA in his own name. The XYZ company pays the freight to the BA and also deposits Service tax @ 3.09 % of Rs. 11000/- to the Government under the GTA head. So far as the transaction between XYZ and BA is concerned the same categorically comes under the GTA head and it suffers taxation also. But the transaction between TO and BA was not subjected to tax until 16.05.2008.

Whether the transaction between TO and BA fulfil the 3 conditions mentioned above:

1. Supply of goods: The truck owner supplies truck to the BA and trucks are tangible goods.
2. Right of Possession: The TO provides the truck alongwith his driver and cleaner and hence it can be said that the right of possession is not parted with.
3. Right of effective control: The truck is provided for a pre-decided journey which is from Ahmedabad to Mumbai and the BA is not given the right to change the same at any cost and if he does so than the driver of the truck can and will refuse to do so unless the TO confirms the changes to him, hence the effective control is also not parted with.

So all the three conditions/criteria are being met.

So the million dollar question that will arise is that, should we conclude that the transaction between the TO and the BA as reflected above will be taxable under section 65 (105) (zzzzj) ibid.

Conclusion

I think the interpretation done above is perfectly in order but in the same vein I also think that it is and cannot be the intention of the Government of India and the Parliament to tax the transport industry in such a manner.

My belief stems from the following 2 reasons:
The whole transaction between the TO – BA and the customer will be chargeable to a phenomenal 15.45% tax (12.36% on the first leg + 3.09% on the second leg) because in another change brought in by notifications 10/2008 of Central Excise, 12/2008 and 13/2008 of service tax whereby the BA agent will not be able to avail and utilize the credit of the service tax charged by the TO to the BA.
The inflationary cost of such a move would be immense and irreparable.

Hence the devil that has somehow crept into the newly introduced law must be pulled out at any cost immediately either by way of an amendment or by way of a notification under section 93 of the Finance Act, 1994. I would not call for a clarification by way of a circular or a trade notice, because in the past these documents have proved to be worthless in honourable Tribunals, Advance Rulings and Courts of law. Recent advance ruling in case of builders/developers/promoters is a case in point.

Nitesh Jain
Chartered Accountant
Mob. No. 9824182629
Email ID – Nitesh101@yahoo.com

Service Tax basics

2008-05-24T13:13:00.002+05:30

I hope this reaches a wide variety of intended audience.

Service Tax in India is of a recent origin (not as recent but not as old either because in taxation parlance the ord recent has a different conotation) - it was introduced in 1994 by the then Finance Minister Mr. Manmohan Singh (todays PM) with an announcement that it would be the most user friendly tax that India has ever seen. He and his successors followed this path since 2004 when the things started changing and complication were being brought in every sphere - be it the haywire definitions of what is taxable and what is not or the penal clauses.

As litigations started pouring in the people are now hearing the music loud and clear that in India what is meant by tax payer friendly is at the end not that friendly at all.

Hence in this background i thought i should start this blog. My intentions are fair and i want to impart as much as i know and if i dont know it will be my endeavour to learn and than advice. So people keep writing in and i promise to come back as soon as time permits.